This article appeared in the Fall 2015 issue of The American Prospect magazine. Subscribe here.

The European project after World War II was among the most noble in modern history. Germany, twice the cause of catastrophic wars, would not be punished but rebuilt, rehabilitated, and contained within a larger democratic European whole. The memory of the Great Depression, on which fascism had fed, would be forever banished thanks to a social contract that brought economic security to ordinary people. A united, secure Europe would never again go to fratricidal war.

Western Europe, threatened physically and ideologically by Soviet Russia, was not strong enough to resist militarily without American help, but could offer a model far more attractive than communism—a splendid case of soft power. Christian Democrats called it a social market economy; social democrats thought of it as a more flexible alternative to socialism. Either way, with national variations but a common ethic, the recipe was a stunning success. It blended economic dynamism with a level of equality and civic vitality not achieved anywhere else, before or since.

The European Union, founded in 1992 as the successor to the original European Economic Community, added a second layer. Europe would be not just a continent with common traditions, converging aspirations and open trade, but an emergent political federation. It would be more than a customs union—an economic union with a single currency, consistent economic rules, and social Europe balancing market Europe at a continental scale. This was intended both to defend and to deepen the model. Gradually, the EU was expanded to 28 nations, bringing in once-fascist states of Spain and Portugal, former Soviet satellites, as well as the Nordic and southern European fringe. It was a counter-model to a failed European past, to communism, and to the harsher Anglo-Saxon form of capitalism.

It is an understatement to say that all of this is now at risk. It would be a miracle if the Europe that we have come to admire survives. All of the pathologies evident in the 1930s, which weighed so heavily on the minds of the EU’s architects, are resurgent—the high unemployment, the economic extremes, the perverse austerity policies, the popular backlash against ineffectual parliamentary politics, and the resulting ultra-nationalism.

To grasp what happened is to appreciate a complex brew of resurgent neo-liberalism, a deeply flawed European constitution, mistaken assumptions, weak leadership, the destruction of countervailing institutions that once served to housebreak capitalism, and bad luck. The European story is a variant on trends common to advanced societies everywhere, where the more inclusive brand of capitalism that produced the success of the postwar boom is giving way to a more rapacious society, “red in tooth and claw”—a line from Tennyson embraced by Margaret Thatcher and company.

IN THE 1970s, the postwar boom faded, a victim of OPEC price hikes, the collapse of the Bretton Woods system of stable exchange rates anchored by the U.S. dollar, and the exhaustion of the stimulus of reconstruction. For the right, the remedy was a return to a more laissez-faire model, even though there was little evidence that Europe’s social market had anything to do with the economic slowdown. After a rough decade in the 1980s, the moderate leftists who came to power in the 1990s—Tony Blair in Britain, Gerhard Schröder in Germany, Wim Kok in the Netherlands, and Goran Persson in Sweden—concluded that it was sensible to embrace part of the neoliberal recipe, both to seize the political center and energize the private economy. The modernized social democrats sponsored substantial privatizations, tax cuts, trims in the welfare state, weakening of collective bargaining, and the deregulation of finance. When the center-right returned to power, conservatives doubled down on the formula.

For instance, the rules of the EU require public entities to allow private competition. In Sweden and the Netherlands, social democrats gamely went beyond the minimums. The Dutch privatized the Post Office, to the point where individuals have personal contracts to deliver mail, often at wages below prevailing minimums. The Swedes, thinking to expand consumer choice, embraced a universal program of public school vouchers. The preponderance of private schools are now run by multinational corporations, and schools are declining in performance and are increasingly segregated by class and ethnicity. The Swedes and Danes undermined the unions by de-linking unionism from unemployment insurance, weakening the ability of unions to enlist dues-paying members. This past January, a Danish coalition government led by the Social Democrats partly privatized a state energy company by selling 18 percent to Goldman Sachs. That so appalled its left coalition partner, the Danish People’s Party, that the party quit the coalition, bringing down the government. There could hardly be a more iconic symbol of the impact of resurgent financial capitalism on the European democratic left.

For the first four postwar decades, democratically mobilized citizens in strong nation-states anchored the social part of Europe while the European Economic Community, predecessor of the EU, promoted the market part. The social contracts were created nation by nation, each with its own politics and traditions. In Sweden, social democracy was very much a national project that invoked the rhetoric of patriotism and the Swedish folk to build political alliance between farmers and industrial workers and promote social solidarity. Scandinavian social democracy is built heavily on trade unionism and social bargaining. French égalité involves a heavier role for the state. Germany is something of a hybrid. One size doesn’t fit all.

The architects of enlarged Europe didn’t quite appreciate the delicate balance between the whole and its parts when they created a union just strong enough to undermine solidarity at the national level, but too weak to build it at a continental scale. Or maybe some of them did. It was Friedrich Hayek who presciently observed that he supported European federalism because it would weaken the power of the state—both nationally and continentally—to meddle with the market.

WHEN JACQUES DELORS, a moderate French socialist, launched a full-blown European Union in the 1980s, the hope was to expand social Europe and market Europe in tandem. But in the actual Maastricht Treaty of 1992—Europe’s de facto constitution—free movement of goods, services, capital, and people are fundamental rights, and social protections are add-ons. When I interviewed Delors in 2011, he told me ruefully, “I succeeded in making a European monetary policy, but not European social or economic policy.”

After the euro became Europe’s common currency in 2002, leadership of the project passed to German conservatives. Their goal, above all, was fiscal balance. Helmut Kohl, chancellor at the time of German reunification, and before the launch of the euro, conditioned Germany’s willingness to give up the deutsche mark on extremely conservative fiscal and monetary rules. Germany is obsessed with price stability because of its experiences with hyper-inflation both in the Weimar period and in the chaos after World War II. More recently, the costs of absorbing the former communist DDR pushed Germany well beyond the fiscal norms that Kohl had imposed on the rest of Europe. All of these provisions, hidden in plain view in the Maastricht Treaty, were mere nuisances until the financial crisis of 2008 hit. The Maastricht rules then gave German Chancellor Angela Merkel and the banks a hammer with which to destroy the sovereignty and social solidarity of lesser nations.

Austerity not only served as perverse macroeconomic policy, but the plans imposed on the debtor states of Greece, Spain, Portugal, and Ireland included neoliberal policies that went far beyond mere budget balance, reminiscent of the IMF in its worst period. According to their EU masters, these countries needed to restore growth to reassure their creditors. How to accomplish that trick at a time of fiscal belt-tightening? Cut wages, undermine collective-bargaining rights, intensify privatizations, reduce taxes on business, and eviscerate social outlays. Basically, the crisis gave a huge political opening for neoliberal policies that are not even effective economics. The resulting stagnation undermines voter confidence in both the nation-state and in the European Union. The European Central Bank, with far less general authority than the U.S. Federal Reserve, serves mainly as the agent of banks. Thus did a project promoted by social democrats in the 1980s and 1990s become an instrument of deep conservatism.

The premature enlargement of the EU, to include low-wage, low-tax countries on its near borders, undermines the model in other respects. The European social market could coexist beautifully with free trade in goods and services. But when Eastern European workers are prepared to work at a fraction of the going wage, and at a time of very high unemployment worsened by austerity policies, that cannot help but pull down wages—and nourish resentment of foreigners.

The austerity policies imposed on Europe should be inviting a democratic-left opposition. But, as columnist Wolfgang Münchau recently wrote in the Financial Times, social democrats today “are all but indistinguishable from their opponents.” As social democrats lose credibility and voter support, when they do get to govern it is invariably in coalition with center-right parties. So there is a one-way ratchet effect. The right comes to power and imposes policies that weaken the model (privatizations, tax cuts, weakening of collective bargaining). When a left-led coalition gets a turn, it can’t muster the votes to reverse the policies.

Many European cities, most famously Amsterdam and Venice, are substantially constructed on ancient wooden pilings. As long as the pilings are maintained in good order, the city endures. But if the pilings are allowed to rot, a city that looks healthy can sink into the mud. Superficially, the European welfare state seems solid enough. The social services are still basically intact. The income distribution has worsened, but not nearly to U.S. levels. The trains run. But the political pilings on which the model rests are near collapse.

IF EUROPE NEEDED ONE more assault to further undermine the model, it came via the refugee crisis. The crisis laid bare two awful fragilities. The first is the dysfunction of the EU as a confederation with multiple veto points and little capacity for leadership in a crisis. As Henry Kissinger reportedly said, expressing his skepticism about the EU as a diplomatic player, “Who do I call?”

The second frailty is that, despite all of the efforts of Brussels to forge a common identity, the continent is still, in the famous formulation of General de Gaulle, one of the original Euro-skeptics, a Europe “des patries”—a Europe of nations. When a crunch comes, most citizens are French or Danish first, European second. And most social contracts are still forged—or not—at the level of the polity. The EU is woefully incomplete as a polity, much less a democracy. All over Europe, the EU is increasingly a project of elites, losing the trust of citizens.

Politically, the collision of a lingering and needless economic crisis with a random refugee crisis has energized nationalism, both moderate and neo-fascist. In Norway, Sweden, Denmark, the Netherlands, France, Finland, Austria, and elsewhere, the second- or third-strongest party is far-right populist. Much of this support is working-class, at the expense of social democrats. In a few places—Spain, Britain (with Jeremy Corbyn as the new Labour leader), Greece—the economic frustration energizes a nationalist left, disgusted with Brussels destroying national sovereignty. This parliamentary fragmentation makes it impossible for the center-left to govern.

The refugee crisis also makes clear that much of Europe’s social compact assumes a common national identity, to which foreigners do not easily fit in. The Swedes have bravely taken a very liberal position on political asylum. But today, with 17 percent of their population foreign-born, Sweden faces segregated enclaves and backlash. A neo-Nazi party won 13 percent of the vote in the last election. Roma beggars are in the streets of the large cities, a new phenomenon that drives the liberal Swedes crazy. “We have a social bargain where we work hard, pay taxes, and we get a lot back,” a senior member of the Social Democratic cabinet told me. “There is no room for beggars.” Why not prohibit begging and create jobs for the beggars? “Then a hundred thousand more would come!”

Thus Europe’s dilemma. Europe might be able to accept a million refugees economically, but it cannot do so politically. The refugee crisis is simply an overlay on a deeper crisis of solidarity and common purpose. Unless there is a renewal of popular energy and a burst of progressive leadership, the three-decade era of broadly shared prosperity—les trente glorieuses, as the French call it—will be remembered as a historical blip. The EU aspired to combine that impossible trinity of the French Revolution: liberty, equality, and fraternity. All three are now on the defensive. In a market economy, creating durable popular counterweights to capital is no mean feat, and even harder when political institutions are fragmented and democracy is under siege. There are peculiarly European features to this story, but the broad pattern should be all too familiar to Americans.

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About the Author

Robert Kuttner is co-founder and co-editor of The American Prospect, and professor at Brandeis University’s Heller School. His latest book is The Stakes: 2020 and the Survival of American Democracy. In addition to writing for the Prospect, he writes for HuffPost, The Boston Globe, and TheNew York Review of Books.